Earlier this week the Court of Appeal handed down its eagerly awaited decision in Pitt and Another v Holt and Another1, unexpectedly overturning what has been known as the principle set out in Re Hastings-Bass.
The principle, which the lower courts have followed for over 30 years, provided a “get out of jail free card” for professionals who, it was often alleged, had negligently advised a trustee on the consequences of a transaction. We previously reported on the prospective appeals in our handout at the December Financial Services Seminar.
The basic principles
In Re Hastings-Bass the Court of Appeal set aside a transaction where assets had been advanced from one trust in to another in order to minimise inheritance tax (then estate duty).
The court’s judgment provided that, in cases where a trustee acted under a discretionary power, a court should not interfere in that action unless it was clear that the trustee would not have acted as he did, had he (i) not taken into account considerations which he should not have taken into account; or (ii) failed to take into account considerations which he ought to have taken into account.
In cases where it was alleged that a professional had acted negligently when advising a trustee it was possible for the trustee to apply to court under the Re Hastings-Bass principle to unravel a transaction (ie put the trustees and beneficiary in the position they were in before entering the transaction). A trustee would argue that he had either (i) taken into account considerations which he should not have considered (eg incorrect advice from an adviser), or (ii) failed to take into account considerations he should have considered (eg an omission on the part of the adviser).
The decisions of the lower courts since Re Hastings-Bass established that a failure to take into account the fiscal effects of a transaction was sufficient to unravel the transaction itself. This interpretation of Re Hastings-Bass came to the aid of financial advisers, accountants and solicitors advising on tax structures involving a trust designed to shelter tax liabilities.#
The Court of Appeal’s decision
This week’s unanimous Court of Appeal decision has effectively overturned the principle which the lower courts had followed since Re Hastings-Bass. In giving the lead judgment Lord Justice Lloyd said there had been a “misunderstanding” of the effect of the decision in Re Hastings-Bass.
The Court of Appeal held that the principle established in Re Hastings-Bass, properly formulated, was instead that where a trustee makes a decision that leads to unintended consequences, the only way to unravel those consequences is either in cases where:
- the trustee acts outside the scope of his powers. Here the transaction would be void; or
- the trustee is in breach of duty. Here the transaction would be voidable (subject to equitable defences such as delay).
When an application has been made under Re Hastings-Bass it has been because the fiduciary had acted within their powers, so there was no scope to argue that the transaction was void.
That leaves the question, what constitutes a breach of duty by a trustee? The Court of Appeal held that a failure to take into account a relevant factor in making a decision could be a breach of duty by a trustee. However, in a situation where a trustee seeks professional advice and follows that advice, in the absence of any other basis on which to challenge the trustee’s decision, a trustee is not in breach of their fiduciary duty. It is not a breach of a trustee’s duty if he acts on advice which turns out to be materially wrong.
The Court of Appeal went as far as to say that where a professional is instructed to advise on a transaction, it is the duty of the adviser to either (i) give the necessary advice, or (ii) point out areas on which advice may be needed which should be sought from another adviser with the relevant expertise.
As Lord Justice Lloyd said in his leading judgment, where a trustee is let down badly by professional advice “it seems to me that (a trustee’s) remedy for that lies not in the realms of equity but by way of a claim for damages for professional negligence”.
There is likely to be general dissatisfaction expressed with the outcome of the Court of Appeal’s decision, overturning such a well-established principle on the basis that the lower courts had incorrectly applied the decision in Re Hastings-Bass.
It is now expected that a number of claims will come to a head against financial advisers, accountants and solicitors. It is no longer open to a professional to argue that a claimant should pursue an application under Re Hastings-Bass to mitigate their loss.
A remedy, which was a quicker and cheaper way to unravel a transaction with unintended consequences, has been removed. The replacement is likely to be prolonged and expensive professional negligence proceedings.
The case is also another example of HMRC closing loopholes and showing a willingness to go to the higher courts in order to claim tax.
Although the decision is surprising it also appears fair. Re Hastings-Bass left a negligent professional adviser in a better position when they were advising a trustee (including a professional trustee) than when advising an individual.
It is unknown at the moment whether the decision is going to be appealed.